CPI Stands for Nothing Real; Wall Street Understands This

I do a lot of reading about financial matters. Recently I was in Barnes & Noble and picked up the December 2011 copy of “Futures” magazine. Browsing through it an article on investing and inflation caught my eye. I bought “Futures”, took it home, and afterwards felt very happy about my $6.95 investment.

There were several interesting articles, and a few that did not strike my fancy… involving MACD and other technical analysis methods. Overall I found it a worthwhile read.

First and foremost I found the reference to CPI-U and shadowstats.com to be the most exciting aspect of “Futures”. I have long been a casual follower of ShadowStats (SGS) and I was pleased to see in print what I have seen online. What Wall Street and many economic statisticians understand is that the government-reported CPI (specifically the CPI-U) has become a bogus indication of inflation. CPI-U remains relevant because of it is tied (directly or tangentially) into many things such as Social Security benefit changes, COLA and TIPS. CPI-U is a “headline number”, but many on Wall Street use their own inflation models. These Wall Street models routinely show CPI-U to understate actual inflation.

Here’s the deal. U.S. Bonds today, while “safe”, simply do not keep up with inflation. Their performance in taxable accounts is even worse. The same holds for money markets and savings accounts. This knowledge is part of the inside baseball of finance, that I like to call financial baseball. For the investor that wants to keep up with inflation, this “inside knowledge” pushes them towards riskier investments including stocks (and stock ETFs), junk bonds, and international stock and bond investments. The bottoms line is that investing is either more risk-prone or inflation-ravaged… or a combination thereof.